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Kwan, Alan Paul

Abstract

This dissertation explores three different perspectives on frictions that impact the functioning of financial markets. My first and third essay explore information economics in financial markets. My second essay studies the role of regulatory scope and how financial regulation should be implemented.
In Chapter 1, “Does Social Media Cause Excess Comovement?”, I study social media’s potential to impact financial markets. When information is costly to produce, information intermediaries specialize in some stocks, creating flows of information and trading among such stocks. Trading by customers results in “excess”, seemingly non-fundamental comovement. Consistent with this theory, I find that co-mentioning of stocks explains increases in comovement. Three different empirical designs point toward a causal interpretation.
In Chapter 2 (joint with Chicago Booth PhD students Ben Charoenwong and Tarik Umar), “Who Should Regulate Investment Advisors?”, we study whether national or local regulators best deter investment adviser misconduct. Dodd-Frank provides us a laboratory to observe a large re-jurisdiction event in which state regulators below an arbitrary threshold were delegated to state regulation. Consistent with weakened regulation, customer complaint rates increase. The complaints represent more severe, not more frivolous reporting. Finally, they precipitate for firms and adviser representatives it might be assumed under the weakest oversight, such as those further from regulators.
In Chapter 3 (joint with Gaurav Kankanhalli and Kenneth Merkley), we study the disclosure paradox of Arrow (1962) – innovation requires secrecy, while financing or otherwise assessing economic value of innovation requires disclosure. Using a novel licensing database setting, in which many agreements are for a decade shrouded in secrecy, we compare the innovation paths of firms with originally redacted, but later unveiled, licensing activity versus those that don’t. We find that as expected, firms that suppress information innovate more. However, the market, recognizing the problem of disclosure, appears to view redaction as a signal of quality, rewarding such firms high higher outside ownership and stock liquidity. We develop a signaling model to rationalize these viscerally puzzling results. Consistent with theoretical predictions, we find factors that reduce or increase adverse selection explain the differential effect on market outcomes of the redacting firms.